5 Steps to a Small Business Loan

Banks may be loosening their purse strings when it comes to lending to small businesses, but it doesn’t mean the process to get capital is going to be easy.  That’s because many banks are wary about lending and will require not only a good personal and business credit score -- but also some skin in the game on the part of the business owner.

“Banks want to see you put your own money into the deal,” says Grafton “Cap” Willey, managing director at CBIZ MHM, the business consulting firm. “If you are putting in a good part of your net worth they will be comfortable that you will work hard.”

From building a relationship with your banker to creating an indebt business plan, here’s five ways to position yourself to get a small business bank loan.

Check your personal and business credit

Unless you can demonstrate high enough revenue, a bank is not only going to look at your business credit standing but also your personal FICO score, which is why business experts say it’s in your best interest to check your credit scores before applying for a loan. If your credit took a hit in the recession, which was the case with many small businesses, work to restore that credit before applying for a line of credit or loan.

“You have to make sure your personal credit and business credit is clean,” says Ted Biggs, SVP & Small Business Western Divison Manager at US Bank. “If you hit a rock or two along the way be prepared to explain those circumstances. They are going to need to understand everything that shows up on the credit report.”

Build a relationship with the banker

Unlike when you apply for a mortgage or personal loan, small business owners have to build a relationship with the bank and banker before he or she applies for a small business loan. According to Malla Haridat, business strategist and creator of Mom and Daughters Inc., that’s important because you want the bank to know you and understand the business long before you request a loan.  By forging a relationship with the bank you’ll be able to get advice and guidance about the loan process when you are ready to borrow.

“You can’t walk into the bank blind,” says Haridat. “[This way] when it comes time to actually apply for a loan you are not just an application.”

Have a strong business plan

One of the quickest ways to derail any chance of getting a small business loan is coming to a bank without an indebt business plan in hand. Since the loan is based on your business and the trajectory for growth, you want to have a well-thought out business plan that covers all the bases.

“The business plan is not only the roadmap that will guide the business owner from start along the way to success, but also is indispensable to prove to the potential lender that the business is viable and will have the ability to repay the loan,” says David Hall, a spokesman for the Small Business Administration. According to Willey, the business plan should outline the business and industry as well as the competitive landscape and why the business will succeed. What’s more, Willey says it should have a three-year forecast for cash flow because that’s what the banks want to see.   He says also to amass a good business team, because the bank is going to look at the people you align yourself with as well.

Have skin in the game

When it comes to lending to small businesses, there’s a lot of risk involved. After all, if the business goes belly up so goes the money the bank lent. For small business owners that want to get approved, you have to be willing to have some skin in the game, says Willey. And it can only be a small portion of your net income.

“If you are putting $100,000 into the deal and your net worth is $150,000, it shows you are committed,” says Willey. “If that same person put up $100,000 and has a net worth of $2 million the bank will be more concerned.”

Be open and honest

Since a small business loan is more than just giving the person money, Biggs says borrowers have to be open and honest about their current situation and if they run into problems along the way.

“You can never be shy about what’s going on,” says Biggs. “No banker wants a surprise.”

So if you are in the loan approval process and your credit score gets a hit, call your banker and tell them right away. If you’ve already gotten a loan and things are starting to go south, be upfront about the problems and solutions, he says.

“Some of the best businesses didn’t always perform the greatest but when they saw issues they came to me and told me,” says Biggs. “Every business is going to have tough times at some point.”